uCloudlink Group Inc.

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to uCloud Link Group Incorporated fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question and answer session. Today's conference call is being recorded. I'd now like to turn the conference call over to your host today, Ms. Jillian Zeng, Investor Relations of the company. Please go ahead.

Thanks, everyone, for joining us on our fourth quarter and full year 2021 earnings call today. This earnings release is now available on our IR website at ir.uclolink.com, as well as our newsletter service. I will give a brief introduction to our UCLOLINK team. Zhi-Ping Peng is our co-founder and chairman of both of the directors. Chao Huichen is our co-founder, director, and chief executive officer. Yi Mengshi is our chief financial officer. Zhu Tan is our vice president of the marketing and sales. Our CEO will begin with an overview of our company and business highlights, which will cover section one of the early presentation posted on our IR website. Our CFO, Yi-Meng Shi, will then discuss our operation highlights and financial results as presented in Sections 2 and 3. Before we proceed, please note that this Quorum contains forward-looking statements made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on measurement's current expectations and observations that involve the known and unknown rates, uncertainties, and other facts not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by this forward-looking statement. All forward-looking statements are expressly qualified in their entirety by the contrary statement with the factors and details of the company filings with the ICC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, chance in market conditions, or otherwise, except as required by law. Please also note that Euclid Link's earnings press release and this conference call include discussions of the non-audited gap financial information as well as the non-audited non-gap financial measures. Euclid Link's press release contains a reconciliation of the non-audited non-gap measures to the non-audited most directly comparable gap measures. I will now turn the call over to our co-founder and CEO, Mr. Chao-Hui Chen, please go ahead.

Yeah, thank you. There are similar contents as the ending presentation of the third quarter of year 2021. I will focus on our technology and recent development. And let's move to the page 13. uClouding 1.0 is our international data connectivity services business. which has had a strong track record of high growth margins and profitability with ongoing growth potential. We have established an intelligent wholesale to retail repackaging solution to minimize the unique cost of data traffic. In that, as data package of single operator all across mobile network operators, mobile virtual operators, are priced differently. This is attributable to our large SIM card pool and our ability to acquire data packages at local wholesale prices from operators and partners. We further differentiate ourselves with our multi-network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience. uClouding 1.0 business monetization model includes retail to see, rental or selling to the end user, wholesale to be, business partners, and our PaaS and SaaS services such as CRM, billing management, devices selling and rental management, etc. For wholesale to be, we can act as a reseller or provide commission services to our business partners. We allow our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee. In year 2021, We strive to accelerate the recovery of our 1.0 business, which was reflected in a positive trend in the daily active terminals, called DAT, of 1.0 business growth. As the number of international travelers increased in various markets, and our 1.0 business revenue increased in the third quarter of year 2021, year over year. The revenues of our 1.0 business in our North American and the Europe market increased during the first quarter of the year 2021 year-over-year. Although the total revenues from the same line of the business experience year-over-year decreased in the same period due to the impact of the COVID-19 violence. Despite the impact the pandemic has had on our 1.0 business, it has also created opportunities for potential growth, including the demand for mobile data related to travel tracking, vaccination records, digital passports, and the COVID test report. We also anticipate that we will see fewer competitors in the post-pandemic market. But we cannot assure you that one point of business will not be negatively impacted by the COVID-19 pandemic in the year 2022. We remain confident in the prospects for international travel with the worldwide vaccination continuing to progress and more and more countries opening their borders to tourists in the year 2022 and beyond. With that, I would like to reiterate our vision for the 1.0 international data connectivity business. Our plan is to not only continue providing existing high-quality 1.0 offerings, but to size big market share with the development of more innovative products and services. Let's move to page 14. uClouding 2.0 is our local data connectivity services business and has become a new drive of revenue growth since the year 2020. Its business monetization model is similar to that of uClouding 1.0, with a massive potential local user base. Our new HyperCon technology contribute to the further development and the growth of our uCloud in 2.0 business. And we have expanded the business scope of our local data connectivity services. Currently, our innovative HyperCon technology is widely accepted by mobile network operators and business partners in various industries with greater growth potential, such as with local partners in China, US, and Japan. Our 2.0 business shows a greater deal of resilience with proven high demand and growth potential during the pandemic. We have operators improve their data services and solve the data connection problems through our PaaS and SaaS platform. We provide high quality data connection for 5G applications in response to to the increased demand for better connectivity services. Furthermore, as people get used to the new normal, our products and services provide better-performing solutions for remote work and learning, which require reliable connectivity as well. For example, our new tablets equipped with Hyper-Con and Cloud Sync technology have been put to use in new industries such as education. We have made progress through HyperCon solution with mobile and fixed broadband business. Under various application scenarios, such as home broadband, for example, our mobile and fixed broadband business cooperation with one of our major network operators in China has been successfully launched and distributed to more provinces. We also plan to embed more Glaucoma Insight, we call GMI, in smart device by cooperating with more intelligent hardware manufacturers. In addition, we have extended our footprint into the more application scenario, including but no limited to Internet of Things IoT modules, industry Wi-Fi loaders, IP camera, power supply, emerging services, like live broadcasting, e-commercial, and autopilot, etc., and are actively exploring new business prospects to serve a broader spectrum of IoT applications. We expect our 2.0 business to grow with the support of our innovative cloud-themed and hyper-con technology. as we continue to introduce our solutions, services, and products to the market and strengthen our cooperation with the local partners. Let's move to page 15. Based on our innovative cloud theme and hybrid technology solution, we continue to develop and broaden our portfolio of offerings with new products and services, such as our self-developed terminals, third-party devices. For example, after we unveiled our new HyperCon technology and products in June of year 2021, we launched these solutions and products to the market in the second half of year 2021, such as Neumann, the world's first HyperCon 5G mobile Wi-Fi, and Genie, a tablet device, in third quarter of year 2021, and a mini-turbo portable Wi-Fi hotspot equipped with Hypercom in the fourth quarter of year 2021. Our IP camera, IPC, has complete testing and expected to launch commercially soon. Our Hypercom technology solution has been well-received and related products are gaining recognition, proven by growing user base across a wider spectrum of industry. Going forward, we plan to launch more of these types of innovative products and services. uClouding positioned itself as a pioneer technology solution provider in the data connectivity market. In year 2021, we made it a priority to invest in research and development, most notably in technologies like Cloudafine and Hypercom that are compatible with various application scenarios, both of which greatly reinforce our technology advantages. Our mature 1.0 business and newer 2.0 business will together promote the long-term development of the PaaS and SaaS ecosystems, which have been recognized by various business partners. As stated in our earnings release, we anticipate growing total revenue for the full year of 2022 by 15% to 35% to arrange between 85 million U.S. dollars to 100 million U.S. dollars, versus total revenue of the U.S. dollar, 73.8 million in year 2021. The company expects to improve financial performance with the support of our commercialized Hypercom technology and related 5G products, the continuous business expansion of our existing portfolio of diverse IoT application scenarios, as well as the ongoing efficient improvement strategy implemented since the quarter four of the year 2001 to reduce operating expense. We believe that From the connected to better connection, uCloud Link is a significant driving force in the transformation of the increasingly advanced information era. We are committed to build a more connected future for more customers and users, and we strive to make a positive impact in serving the global user community. I will now turn it over to our CFO, Yimeng Shi, who will go through business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. Let us turn to page 17 for our business highlights. The left-hand side of the slide shows Daily Active Terminal, DAT, as December 31st, 2021. Average daily active terminus in the fourth quarter were $265,595, including $1,585 owned by the company and $264,010 owned by our business partners. representing an increase of 28.7% from the 206,400 in the fourth quarter of 2020. EuclidLink 2.0 service accounted for around 69% of the total DAT during the fourth quarter of 2021. Average daily data usage per terminal was 1.73 gigabytes in December 2021. This is page 18, which shows global diversification of our business. We had 97% of the total revenue from outside mainland China. During the first quarter of 2021, Japan contributed to 37% of the total revenue. For other countries' revenue, the US market had the largest contribution to our business with further development of our US business. And we will continue to expand all the market, such as Japan, China, Europe, and Southeast Asia, et cetera. During the first quarter of 2020, we had 5% of total revenue came in from mainland China, 47% of the total revenue came in from Japan, and 48% of total revenue came in from other countries and regions. It's up to page 20. I will go through our financial highlights of the first quarter of 2021. Service-related revenue as a percentage of total revenue was 54.8% during the first quarter of 2021, compared with 52.9% during the first quarter of 2020. Revenue from POS and SOS service increased 43.5% from $1.9 million in the first quarter of 2020, to $2.7 million in the fourth quarter of 2021. This increase was primarily due to the expansion in the number of our business partners that use our PaaS and SaaS service to provide local data connectivity service. Revenue from PaaS and SaaS, a percentage of total revenue, also increased to 15.2% during the fourth quarter of 2021, compared with 10% 0.9% during the first quarter of 2020. Let's also move to page 21, which shows the revenue breakdown of our two billion segments, namely revenue from surveys and sales of products. Our total revenue increased by 3.2% from $17 million in the first quarter of 2020 to $17.6 million in the first quarter of 2021. Revenue from service were $9.6 million, presenting an increase of 6.8% from $9 million for the same period, 2020. This increase was primarily attributable to the increase in revenue from local data connectivity service and the power source service. Let's turn to page 22 for the gross margins of our bonus. Our service gross margin increased to 46.1% in the first quarter of 2021 compared to 41.2% in the first quarter of 2020. And our overall gross margins was 31% in the first quarter of 2021 compared to 31.4% during the same period of 2020. The increase of our service gross margin during the first quarter of 2021 was primarily due to the increase of our past source revenue, which has higher gross margins over other than its revenue. Let's also move to page 23, which shows a breakdown of our operating expenses, excluding share basis compensation and others. Excluding share basis compensation, operating expenses of the percentage to the revenue was 62% in the first quarter of 2021, compared with 83% during the fourth quarter of 2020. The past few years have been the peak time for research and development, and we will optimize that research and development cycle and continue to improve our operation efficiency of our donors. Let's turn to page 24. Operating cash flow was elective, $3.2 million during the fourth quarter of 2021, compared to negative 5.5 million US dollar during the first quarter of 2020. Our cash and cash equivalents and short-term deposits were 8.8 million US dollar as at December 31st, 2021. Our CapEx was 0.2 million US dollar during the first quarter of 2021 compared to 0.4 million during the first quarter of 2020. CapEx as percentage to the revenue decreased from 2.2% during the first quarter of 2020 to 1.3% during the first quarter of 2020. Let's move to page 25. Net loss during the first quarter of 2021 was $15.5 million compared to $12.4 million during the first quarter of 2020. Adjusted EBITDA was negative. $5.1 million during the first quarter of 2021, compared to negative $7.9 million during the fourth quarter of 2020. With that, let me conclude today's presentations. Thank you, and we start our Q&A session.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your touchtone phone. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. And our first question today comes from Lisa Thompson from Zacks Investment Research. Please go ahead with your question.

Hi, good evening. Thank you for that presentation. So I have a number of questions about the quarter. First, could you just tell us what's the current fully diluted share count now that you have a convert?

Hi, Lisa, can you repeat the question?

Yes, what's the current fully diluted share count now that you've issued a convert?

Yeah, well, we will disclose that the diluted shares take into account this convertible dependent issuers in this January. So that figure will be disclosed in the first quarter only released this year.

Okay, so there's no number. All right. As far as cash burn, where are you now? Is it a million dollars a month or less than that?

In the first quarter of 2021, we burned 3.2 million US dollars for operational sales. cash flow. As of December 31st 2020, the company had a cash and cash equivalent and short-term deposit 8.1 million US dollar and short-term investment 12.6 million US dollar. So in January 2022, the company completed an insurance of a convertible departure through private placement with the proceed of $4.7 million, based on the company's projection cash flow and its existing balance cash-to-cash equivalents, short-term deposit and short-term investment. I think the companies have sufficient funds for sustainable operations. And the companies take as measures to successfully execute its business plan, which includes increasing revenue while controlling operating expenses to generate positive operating cash flow and obtaining funds from external sources as well. So we expect the cash flow rate will be improving this year materially, and so we expect to take into our guidance and others. We're managing the cash flows in healthy positions for this year.

So do you think you'll get to cash flow break-even by the end of the year?

That's where we are expecting, and we will achieve management that will be take efforts to achieve that target.

All right. As far as the income statement, could you say what was that $8.7 million in other expense?

What caused that?

You mean the breakdown of those operation expenses?

Right.

Are you there? Yeah, what's in that number?

What's in the number, the $8.7 million? What's in there? $8.1 million cash balance, right?

no 8.7 million other income on the income statement under under general and administrative right there's 8.7 million dollars in expense

Lisa, can we have feedback on this underlying for these figures after this call to you? Is that okay? Okay.

That's not an easy answer. Also, could you give an update on... Do you still have the education order for tablets in Japan? Or has that been canceled?

And when might that start? Can I pass the question to the CEO to answer this question?

Okay. No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no.

The school in Japan, it's a face-to-face education. We start again, so the speed is a little bit slower than our expectation, but still going on.

Okay. And is there an explanation for why revenues in Japan are declining?

Yeah, I think it's clear because, you know, the first when the COVID-19 happened, because local requirement is big, it's huge. But because face-to-face meeting, you know, because the year 2021, the Q2, Q3, and recovery, and the Q4, because COVID-19 violence become worse again. But before that, because of the, you know, the pandemic is getting worse because of the vaccination, because of the, you know, the the new medicine come out. So face-to-face meetings, so in face-to-face education and remote working, so decreased in Japan. That, you know, the domestic 2.0, a little bit decreased.

Okay. And my final question is, are there any more products you plan to launch soon?

Yes, you can see we have U5 Lumen, which is the world's first 5G with the HyperCon solution that can switch between Wi-Fi, all the 5G, 4G, all the network. So this launched in the third quarter. And because the radio band only with Asia and Europe radio band, we don't have global radio band at the moment. And recently we will launch our new product, we call U50 with global radio band and a more competitive price to accelerate the 5G product launch. That's one part. And the second part, we have more like a CPE IoT module with the Hypercom inside. So we are launching. As I mentioned in the first quarter, We finished the testing for more IoT products such as industrial loader. We launched in the fourth quarter of year 2022. The new module, more competitive module, we launched in the fourth quarter of year 2022. Also, we have IP camera product launched in the first quarter of year 2021. That's more product come up, including the 5G, including, you know, more IoT product. And also, you know, we have more hypercom product impact into our, you know, international roaming Wi-Fi as well.

All right, great. That's something to look forward to. Thank you. That's all my questions.

And our next question comes from Vivian Young from Diamond Equity. Please go ahead with your question.

Hello, everyone. Thanks for taking my question. So we see the company maintain top-line growth during the second half of last year with strong partnership with business partners and the past business growing. So we'd like to know why the company effects of 4% to 21% year-over-year decrease in first quarter 2022 revenue, what's the main reason for the decrease in outlook?

The guidance for the first quarter of this year 2022 ranges between $14 million to $17 million. That's a decrease compared with the last year's, the first quarter of 2021. Yes, as we stated, the COVID-19 has an impact on supply chain. Now in this quarter, the first quarters, some lockdown, some lockdown codes, in China and Shenzhen and Dongguan, these kind of areas. And that gives us some difficulty to manufacture and deliver some orders at hand. And there are some reasons that we are aware recently. So we expect the first quarter's guidance to be a little bit dropping compared with last year's. Ms. Chen, do you have some color on this first quarter's guidance decreasing?

Yeah, so many because of two reasons. One is because of, you know, Omicron, you know, COVID-19 violence. And the second is because of the lockdown in China, in Shenzhen and in Dongguan, that's our manufacturer base. That's heavy impact our revenue. So by the fourth quarter, but we believe, you know, in the second quarter, because of more country open, and the commonizing violent impact will be decreased.

OK, I understand. So my second question is regarding your ongoing restructuring. Can you provide some additional color on why the company adjusted the value structure and the local business in China? And will this affect the company's future revenue in China as well? Thanks.

Yes, as we disclose this year, we continue to evaluate our business plan and we have decided to adjust our business model in China. Yes, so on March 17, 2022, the equities of VAE was transferred to the Shenzhen Ecolink Technology Limited. An original VIE agreement was terminated. So we believe the restructuring will not affect our Eucalyptus 1.0 international data connectivity service in China. So we will transfer and carry out the PathSource platform service in China in cooperation with the local business partner, such as we invested in the NVO Beijing technology. which have the required license to provide local data connectivity service in China. So we adjusted the model in China as similar as we did in Japan. So you can see our Pathsoft ecosystem and our Pathsoft service applied to cooperate with a local partner, either in Japan, in China, are the other regions of the world so that's we adjust a bit more that to to acute part-size platform centric it's a business model and strategies as well so and that's that's a I think there's a key key reasons we we adjust the very models in China I think this give us a give us a more secure position in compliance and operation as well. And give us a position cooperated with the local partner to do the business in local market.

OK, that's all my questions. Thanks.

And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Euclid Link Investor Relations. through contact information provided on our websites or equity growth investor relations.

And ladies and gentlemen, I apologize. This is the conference operator. We do have a late joining question from Jacob Kurtz from Greenridge Global. Jacob, please go ahead with your question.

Hi. So daily active terminals continue to increase in the current quarter. but total data consumed slipped compared to the third quarter. Should we expect to see both numbers rise over the course of 2022?

This data consuming daily active terminal will be a change in terms of this package salience mix. and different target policy and then the customers choose so that that's a that's a change it's a statistics figure um so we uh we we cannot uh we cannot accurately expect uh forecast and this uh this data consuming per uh per daily active terminal will be increasing us to somehow We don't know. We cannot give this a clear color on this kind of consumptions per this average daily terminal.

Okay. And then my next question. Assuming travel restrictions stay roughly similar to what they are now in China for the remainder of 2022, what percent of total revenue do you expect from 1.0 and 2.0?

And you specifically mentioned this revenues from China, mainland China.

Sorry, what was that? Sorry, can you clarify your question?

Assuming travel restrictions stay similar to what they are currently in China for the remainder of the year, what percent of total revenue do you think 1.0 and 2.0 will account for by the end of the year?

um yeah um this uh this uh uh covid restrictions uh is still uh is still uh implemented in in china uh across across across city and something uh so um the china the chinese uh the border has not been opened to the outside We don't know when the Chinese are open to the outside this year. But we do expect the border has been opened and lifted up in the U.S., European, and some Asian countries like Japan, Singapore, some other Asian countries as well. So as you're aware, we run a business Of course, worldwide, we have diversification business for more than 50 countries and regions. Yes, China's contributions are smaller at this moment. The rest outside of the China mainland, when there's international travel, has been recovered due to the opening up of the borders. So we expect that we have the international connected service will be improving outside of China this year. Another will be give us a growth and improve our profitability as well for this year.

Yeah, I have some more comment from Jeff. So in the China market, so we don't expect 1.0 business recovery because we think maybe end of next year we'll start open the border of China. That's our forecast in the worst case. We don't think that will happen in China for open the whole year. So that's one. So in China we are mainly focused on the 2.0 business and the IoT business. So that's in China. So for international business, so we only know to very, you know, know to very, you know, optimize data. For example, we don't think, you know, under the COVID-19 impact. So in the worst case, we don't think the world open very quickly. We start think in a Q2, some country open the, you know, the border of the country. But majorly of the outside China countries will be staffed on the Q3 or Q4 to open the country. That's our assumption.

Okay. And then my next question. The markets outside of China and Japan have been showing strong growth recently. Are there any countries or regions driving this? And do you expect to see growth continue to be faster in these regions?

Yeah, so once we thought in the two pro-challenger, one is about the, you know, regulation, you know, challenger, and also, you know, for the IoT. So we, and also the recovery of 1.0 in China, we believe we will regain the fast growth in China.

For others, the potential to fast growth, we expect Japan's market and the U.S. market and European markets will be the main growth for this year.

Okay, awesome. And then last question. Was the settlement with CMO Holdings completed?

Sorry, can you repeat?

Was the settlement with CMO Holdings completed?

That was, yeah, that was set up last year. We announced that settlement agreement last year. And so it's peaceful. No more negations between the Eukaryotes and SEMO.

Okay. Thank you. I appreciate it. That's all.

Thank you.

And, ladies and gentlemen, with that, we will conclude today's question and answer session and conference call. We do thank you for attending today's presentation. You may now disconnect your lines.